Nervous investors drove down shares of Bank of America a punishing 26 percent on Tuesday, its biggest one-day decline since at least 1980, the day after the Charlotte bank announced a big drop in earnings and an unexpected dividend cut.
The bank had said Monday that third-quarter profits fell 68 percent from the year before, as defaults spread to almost all areas of consumer lending.
Still, analysts on Tuesday continued to view Bank of America as one of the few stalwarts of the industry. “Their earnings weren't great,” said James Early, an analyst at The Motley Fool. “But nobody's doing great in this market.”
Bank of America said Monday that it hopes to close its purchase of Merrill Lynch earlier than first announced – by the end of this year, instead of by the end of March.
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The bank also said it will assume the $21 billion in outstanding debt of Countrywide Financial, the California mortgage lender it purchased on July 1.
That was good news for Countrywide's bondholders, who had fretted that Bank of America would leave them in the cold. In an April regulatory filing, the bank had said there was “no assurance that any of such debt would be redeemed, assumed or guaranteed.”
Bank of America released its earnings after the markets closed on Monday, two weeks ahead of schedule. Its shares closed at $23.77 on Tuesday, down $8.45.
It was a bad day for stocks in general, with the Dow falling 5 percent, and for financial stocks in particular. Merrill Lynch fell 26 percent. Another investment bank, Morgan Stanley, fell 25 percent.
As announced Monday, Bank of America raised $10 billion from investors Tuesday. The bank also said Monday it plans to slash its dividend payout. The moves are intended to shore up capital in a turbulent market, but they also hurt shareholders for the short term. Analysts noted Tuesday that the bank will also need extra cash to pay for costs related to buying Merrill Lynch.
Analysts believe the bank announced earnings early because it's anxious to raise money before competitors flood the markets with the same intent.
Wells Fargo & Co., for instance, said last week that it will raise $20 billion to help pay for its purchase of Wachovia Corp., though that acquisition is far from finalized.
The dividend cut, from 64 cents to 32 cents, is a sharp departure from the previous course of Bank of America, which bragged earlier this year that it had raised the dividend for 30 straight years.
Howard Silverblatt, senior index analyst at Standard & Poor's, noted that before Monday's announcement, Bank of America had paid the second-highest dividend of all the S&P 500 companies, behind only General Electric. Now, it will fall to No. 5.
“Obviously there have been people who were holding that stock for its dividend,” said Early, the analyst. “So they're going to sell and get out.”